Question

Given the federal budget deficit in recent years, some economists have argued that by adjusting Social Security payments for inflation using the CPI, Social Security is overpaying recipients. What is their argument, and do you agree or disagree with it?

Short answer

Yes, this argument is right in a sense.

Step-by-step solution

Step 1. Definition

The social security act is started to give benefits to retirees and the jobless also dependent mothers and children, victims of work-related accidents, and disabled people.

Step 2. Explanation

The argument which is given in the question by some economists is somehow true because of the following reason:

The CPI exaggerates the rate of inflation because of new good bias and substitution bias. The main purpose of adjusting the social security payments is to keep the same purchasing power. If by using CPI they are adjusted, then the payments incline by more than the universal price level. Additionally, the basket of goods purchased by retirees may not reflect in the basket of goods used to calculate the CPI. Specifically, retirees tend to buy more goods and services like health care, Medicare and the prices of healthcare will rise faster than the general inflation rate as measured by CPI.